Financial instruments for buying a new boat have increasingly become a mix of those used to buy a car or real estate. Financing, mortgage, management programs, even long-term rental. Luca Bosazzi, maritime broker in Abayachting helps us gain clarity by explaining what to know about buying a used boat with a current boat lease.
What we are talking about today
- Marine leasing: what to know about buying a used boat
- Solution 1: Take over the current nautical lease
- Solution 2: direct purchase WITHOUT takeover
Marine leasing: what to know about buying a used boat
But the real evolution was that of the nautical leasing, which for many years has allowed (and still allows) the purchase of new boats using a rather simple formula: relatively low down payment, amortization plan of 4 to 15 years, and most importantly, subsidized VAT, which, however, as of November 1, 2020, is governed by a decidedly more… “stringent” regulation. What does this have to do with buying used?
It has everything to do with it! When you buy a used boat, you inevitably inherit the decisions of the first owner: interior color, number and layout of cabins, equipment and facilities, and finally the financial situation. The starting point then is to ascertain whether there is a current lease on the boat we are interested in.
Better to take over the lease or terminate it?
In this article we try simulations for buying a 13-meter boat. I chose this benchmark measure because, in addition to being an average cutoff on which a good statistic can be made, the vat allowance on rentals is 11 percent for both sailboats and powerboats. Let’s see what the two different starting and ending situations are on a case-by-case basis.
Assume that the boat is put on the market at euro 200,000, that the market value is actually euro 200,000, and that seller and buyer agree on euro 200,000. We also assume that the outstanding debt at the time of the proposed purchase is 100,000 euros + vat.
Solution 1: Take over the current nautical lease
This sounds easy to understand, but beware. First, we have to accept that a third “player” is added to the negotiation, which is the bank. Unlike the seller and the buyer, who are two players with whom a negotiation can sometimes be made, the player bank does not make negotiations, has no urgency, has no financial interests.
In addition, the analysis on the real feasibility of the transaction remains at the sole discretion of the bank itself, which will assess third-party income and financial commitments.
In nautical leasing, we have a bank (or finance company) that physically purchases the boat from the shipyard builder or dealer, and leases the use to one or more private parties. These, with an amortization schedule of usually 4 to 15 years, reduce the outstanding debt until final redemption. At present, the vat subsidy of fees according to hull length remains valid. What will happen in the coming years is not very clear, but it matters little here. A vat rate of 22% is applied on the final redemption if the boat is in Italy.
In the case of a takeover, some banks grant the new user the option of retaining the subsidized vat on the lease payments, but provided that the contract is not changed. The costs for “purchasing” a boat by leasing (I put quotation marks because it is not actually a purchase, but a simple transfer of contract) are as follows:
- Cost of inquiry to the bank: about 500 to 800 euros
- Cost per license upgrade: about 800 to 900 euros.
And that’s it? For now, yes, but not quite, because when the lease is terminated, it will be mandatory and necessary to buy the boat outright from the bank, and then face the costs of the transfer of ownership, amounting to about 1,000 euros (the registration fee is fixed since the “seller” is a company). It is important to remember a few things: the vat relief applies as long as the user is eligible for the plan. What does it mean? That sellers often regard the vat relief on the remaining debt fees as a benefit to be given away, but they are actually giving away a debt.
So how much money do I have to give the seller in order to take over the lease?
The pivotal question the buyer will ask the Maritime Broker is a given: “So how much money do I have to give the seller in order to take over the lease? How do you do the math?”
From here on, several scenarios open up, some of them really imaginative.
How is the counting done?
- Example 1:
outstanding debt euro 100,000 + vat 11% = euro 111,000, so difference of euro 89000 in favor of the owner. In reality with this solution the buyer exposes himself to several risks: in case of early redemption (necessary for any reason) the vat applied will be 22%. Moreover, none of us can know how much longer the state will allow the preferential vat to continue. This count is great for the seller, bad for the buyer.
- Example 2:
outstanding debt of euro 100,000 + vat 11% + sum of interest on installments until the end of the debt (let’s assume another 15,000 in interest) = 126,000, so difference of euro 74,000 in favor of the seller, who basically bears all the interest on an amortization plan that he is giving up. In my opinion it is really meaningless, besides the fact that the amount of interest depends on the length of the amortization plan. This count is great for the buyer and bad for the seller, especially in the case of very long plans and therefore with a lot of interest.
- Example 3 (the recommended one):
outstanding debt of euro 100,000 + vat 22% = euro 122,000, so difference of euro 78,000 in favor of the seller. The buyer takes over a debt, and inherits, at least for the time being, vat relief on the lease payments and interest on the repayment plan. This solution is in my opinion the best, if only because it is clear, assertive and without surprises.
Having found an agreement between the parties, my suggestion is to instruct the takeover file before the appraisal, so that if the appraisal is unsuccessful, no one has been charged with site and appraiser fees.
Another sensitive issue is the availability of the boat during the waiting period: does the boat remain “under offer” and therefore reserved for the potential buyer? It often happens that you wait 2 months for an outcome, and in the end the answer is negative. Is it fair that the seller could not sell the boat to someone else?
In my opinion, the boat should remain free while formalizing an official proposal that would become irrevocable if successful.
Consider that the banks’ availability, efficiency, and timing in handling a takeover is not always satisfactory. Take this into account, both sellers and buyers, and arm yourself with holy patience.
Last but not least: on what date does the takeover take place? Takeover occurs when the parties sign the agreement and it is deposited with the bank. Only at this time will the seller receive the agreed-upon amount. The Maritime Broker usually guards the agreed fee, and releases it upon final takeover. The money transaction is perfectly regular, and I suggest signing a side agreement for the transfer for consideration. Some banks already do this automatically.
Solution 2: direct purchase WITHOUT takeover
The boat will then be sold by the seller to the buyer at the agreed figure of 200,000 euros. But in reality the seller is still not the owner of the boat. The real ownership is still with the bank. In this case, the procedure is much faster, but even here we need to be careful about certain aspects.
First, the seller must ask the bank for an early redemption statement, which will include 22% vat and a fee for interest not collected by the bank. This fee is often referred to as a “penalty,” and I repeatedly hear it referred to as abuse. I don’t find anything wrong with it: the bank lends money, and assumes to earn a certain amount of money. The customer independently decides to terminate the relationship prematurely, and the bank demands recognition of at least part of this lost income. Rather, it is advisable to ask well for all the information and conditions of the contract when first signing it, so as not to run into unpleasant surprises.
Direct purchase WITHOUT taking over the nautical lease
Let us then assume that the early redemption count may be 100,000 euros + vat 22% + 5000 = 127,000 euros
It will then be necessary to arrange two acts of sale, which tend to be arranged simultaneously: the first in which the bank sells the boat to the “seller,” and the second from the seller to the buyer. The costs of the first transfer of ownership are borne by the seller; the costs of the second deed are borne by the buyer.
The crucial step is the payment of the first act.
The banks want the redemption of the boat to be made strictly by the user, who must then pay from his own funds. But what if our seller does not have the liquidity of 127,000 euros to advance if only for a few days?
I suggest. DO NOT advance to the seller the cash needed for redemption, not least because doing so is really risky: while retaining the good faith of people, at the moment the boat is redeemed there is no protection and guarantee for the final buyer, who in case of problems of any nature Would completely lose the money paid in advance.
If, on the other hand, the seller has the necessary liquidity to redeem the boat, it is important on the contrary that the buyer has already committed to the final amount: this is to avoid that in case of problems the seller finds himself not having sold the boat, and having already redeemed it from the lease!
In both cases, the intervention of the Maritime Ombudsman can act as a guarantor to ensure that all transactions are carried out at the same time so that both parties are protected.
In conclusion: if there is an ongoing lease I suggest taking over, so as to keep the position open, which could come in handy in case of resale and would prevent you from an immediate cash outflow. All this with the understanding that the ownership of the boat is the bank’s (and not yours….), and that you have to interface with it for everything.
On the other hand, if you have the liquidity, and you like to be independent and free to move without any constraints, well…. Buy it directly with no worries.
Happy buying (or happy selling)!
Luca Bosazzi – Maritime Mediator in Abayachting